When reports of fraud and abuse among defense contractors became front-page news, the Justice Department and the Pentagon set up a joint strike force to prosecute the biggest and most complex cases.

But after nearly three years of operation, the Defense Procurement Fraud Unit has been charged with failing to live up to its billing.

"They haven't gone after the big people," said Sen. Charles E. Grassley (R-Iowa), chairman of a Senate Judiciary subcommittee investigating military fraud. "The people being convicted are small potatoes. These are cases that the local U.S. attorney would have prosecuted anyway.

"They're skimming the cream to build up their statistics and run off press releases on their mimeograph machine," said Grassley, who said he plans to press the issue with Justice Department officials at a hearing this week.

Morris B. Silverstein, chief of the Justice Department unit, said its job is to screen allegations referred by Pentagon investigators and to prosecute the most promising cases. He said the office cannot be blamed if no case has surfaced to rival General Dynamics Corp.'s $843 million in submarine cost overruns in the late 1970s.

"We handle what comes along," Silverstein said. "You can't go out and create these cases.

"We are involved in some very substantial major investigations which are highly complex, involving esoteric issues of accounting and contract law. We are looking at major defense contractors with names that anyone would recognize."

The fraud unit has obtained 19 convictions for bribery, false claims and labor mischarging. But half were related to one investigation of a Philadelphia supply yard, and most have resulted from guilty pleas. The unit also helped recover $10.3 million last year and has been involved in 47 suspensions or debarments of military contractors.

Grassley called these results "a spit in the ocean. They're taking the easy way out, negotiating settlements as opposed to prosecuting . . . . If they would bring and win a case against a big contractor, it would set an example that would have a beneficial impact."

Some Pentagon officials say the fraud unit is too small and that it has turned down a number of complex cases as lacking jury appeal. These officials say the unit prefers to handle easy cases and that it often agrees to questionable settlements rather than go to trial.

"They jump all over these little companies, but on the large, politically embarrassing fraud, it's very hard to get the Justice Department to prosecute," said Dina Rasor of the private Project on Military Procurement.

Grassley's subcommittee has asked for summaries of each case the unit has reviewed. Silverstein said he cannot release information on pending cases and that it would be extremely time-consuming to summarize closed cases because the 17 lawyers and investigators keep only informal records.

This could set up another confrontation with Grassley, who has demanded the Justice Department's records of previous investigations of General Dynamics and two other major contractors. Grassley met with Attorney General Edwin Meese III to try to break the impasse.

The unit's only case against one of the top 20 military contractors involved Sperry Corp., which pleaded guilty to cheating the Air Force out of $325,000 by falsifying bills on the Minuteman missile. Sperry, which receives more than $1 billion a year in contracts, paid $850,000 in penalties.

But the federal judge in the case, citing audit findings that Sperry had overcharged the government more than $3.3 million, criticized the settlement and the fact that no company official was prosecuted. Justice officials maintain that the settlement was sound.

Richard Sauber, the unit's director until last summer, said the Pentagon's overpayments for "$7,200 coffee pots and $600 toilet seats generally don't amount to criminal cases because there's no deception, no fraud, no misrepresentation about what's involved. There are some very gray cases where it's not really clear that the government didn't know or at least acquiesce in what was going on. You have a relationship built up between the company and the customers -- the Army, Air Force and Navy."

Sauber, who now represents Litton Industries and other contractors, said his clients "are trying to avoid being suspended or debarred. We try to convince the government that everything has been done to right the wrong and that the money will be paid back."